Sell Hasbro as Toy Spending Declines: Goldman

By Avi Salzman

Sorry Johnny, but this Christmas your stocking might be a little light. Goldman Sachs analyst Michael Kelter says toy spending has been on the decline, and the pace of the dropoff appears to be accelerating.

“The nominal amount spent on traditional toys/games in the US per capita is down 30% from $85/person to $60/person since 1998, and the pace of declines has accelerated to 5-10% year to date. The two multinationals, MAT and HAS, derive 50%-60% of sales from the US, and another 20%-30% of sales from Europe, which is showing similar (though not as pronounced) declines. We believe this will drive a multiple re-rating in the sector.”

Hasbro (HAS) could be hit hard by the deceleration, writes Kelter, who sees 19% potential downside for the shares. Games an dpuzzles are declining faster than other parts of the toy industry, and those items make up 25% to 30% of the company’s sales. Toys for boys like Transformers also appears to be “overearning” at the moment. “[M]eaningful dividend increases may be limited given HAS already pays out 75% of its FCF to investors via dividend.”

Kelter also lowered his earnings estimates for Mattel (MAT), but he considers Mattel better positioned to weather the slowdown. Kelter rates Matel at Neutral, with a $33 price target.

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